Debt burden: India Inc's credit downgrade on the rise, says Crisil

Another indicator that justifies Moody’s downgrade of India’s top bank, SBI, is the accelerated pace of downgrades by rating agency Crisil.

Crisil rates debt instruments of companies and rising downgrades indicate the deteriorating quality of debt in the industry.

While upgrades are slowing, India Inc is witnessing an accelerated pace of credit downgrades as pressure on profitability mounts and demand moderates, Crisil said on Tuesday.

Crisil’s downgrade rate has gone up to 3.1 percent in April-Sept 2011, compared to 2.9 percent in the second-half of the last fiscal year. The upgrade rate has fallen to 4.6 percent from 6.3 percent in the same period. Crisil rates about 7,500 companies and Rating Action Ratio, its gauge of relative frequency of upgrades and downgrades, has fallen to 1.03 from 1.1 and may fall further.

A rating downgrade either reduces the ability of a company to raise further funds or even if it manages to do so, it is at a higher rate than the earlier debts. For banks, these downgrades are an indication of the fading value of its loan books. Moody’s in its report has warned about the rising provisioning of non-performing assets in SBI. Around 40 percent of the loan book is likely to either become a non-performing asset or will need to be renegotiated.

“We are expecting further downward pressure (on rating action ratio), primarily driven by demand moderation,” Roopa Kudva, managing director of Crisil said, adding 10 of the top 20 industries in terms of loans outstanding are showing clear signs of slowdown in growth.

[caption id=“attachment_99399” align=“alignleft” width=“380” caption=“Crisil rates debt instruments of companies and rising downgrades indicate the deteriorating quality of debt in the industry. AFP”] [/caption]

Crisil upgraded the ratings of 313 companies and downgraded 207 companies in April-Sept. compared to 675 upgrades and 269 downgrades in 2010/11.

Demand has been significantly dented in consumption-linked automobiles, real estate, textile and retail sectors, while sales growth has started faltering in investment demand-driven cement, capital goods and construction sectors, Crisil said.

It has projected a growth rate of 2-4 percent for passenger vehicles in 2011/12, significantly lower from an earlier forecast of 8-10 percent.

India’s auto sector grew at a breckneck 30 percent in the previous fiscal but has lately faltered, registering a drop in sales in July and August.

Rate hikes by the Reserve Bank of India (RBI) - a dozen times since March 2010 - to tame a stubbornly high inflation has hurt consumer sentiment and dissuaded buyers from buying cars or properties on credit.

The rating agency said growth in export, which has remained buoyant so far, too may be dragged down by a slowdown in the United States and uncertainty in Europe.

Profitability will remain under pressure and high interest rates, wage and input costs would continue to reduce margins, it said.

Indian companies’ second quarter margins would contract by 100 bps on slower volume growth, higher costs, Crisil said last week.

Reuters